Banks ordered to approve fewer risky loans as Australian property market heats up | Australian economy

A crackdown on risky loans will limit banks’ capacity to issue big mortgages as the financial regulator launches a pre-emptive strike against the growing excesses of an overheated property market.

The Australian Prudential Regulation Authority has announced a 20% cap on the share of loans that new banks with debt-to-income ratios above six can provide; This means a mortgage worth more than six times the borrower’s income. Jim Chalmers said the move would “help financial resilience and housing affordability”, but the Greens were quick to criticize it as inadequate.

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The newly announced restriction comes at a time of dizzying growth in property prices and loans, with a recent report highlighting that the typical household must allocate almost half its pre-tax payment towards the average new mortgage payment.

The boom in loans to homeowners has regulators particularly worried. Property investors account for two in five new loans, and the value of investor loans rose 18% in the September quarter alone.

The credit crackdown will begin in February and Apra chief executive John Lonsdale said the regulator was prepared to intervene further.

“If we see macro-financial risks rising significantly or credit standards deteriorating, we will consider additional limits, including investor-specific limits,” he said.

It’s been a decade since the regulator last intervened to put a cap on runaway lending and drive down house prices.

It’s unclear whether the latest move will make a meaningful difference: Apra data shows only one in 10 new loans made to investors have debt-to-income ratios of six or more, and one in 25 homeownership loans are made.

Chalmers said the new restrictions were “prudent steps to continue responsible lending”.

“These rule changes are an important way for regulators to reduce risk in our economy, but these efforts will also help get people into homes.”

But Greens senator Barbara Pocock said that while the move was a welcome start, it did not go far enough and “first home buyers were priced out by investors at weekend auctions”.

“Apra must use every tool in its toolbox to rein in investor lending that is worsening the housing affordability crisis,” Pocock said.